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Reserve Bank refocuses, somewhat « Previous | |Next »
August 12, 2008

The Reserve Bank's narrative over the last year has been a simple one. Inflation needed to be squeezed by slowing economic growth. there was too much growth and too much inflation. So to slow the economy, it lifted rates four times in seven months, in an economy already heavily loaded with debt. In doing so it downplayed the US credit crisis caused by the masters of the universe and the way that the crisis kept getting deeper. The narrative said that Chinese demand for Australian resources should cushion its economy from the global downturn, and it downplayed the way that falling demand from the US would affect China's demand for Australian resources.

Now the direction for interest rates is down, even if it is unclear what the speed of the gradual reduction will be. Why so? Because, though inflation still remains high, the inflation squeeze has done its job: economic growth is slowing, especially in those states with no export coal and iron ore mines. Though they are experiencing increasing unemployment, lower consumer spending, falls in house prices, the Reserve Bank is still primarily focused on inflation.

What continues to be downplayed is the increasing probability that the global economy - not just the US - will experience a serious and protracted recession. As Nouriel Roubini points out

Macro developments in the last few weeks suggest that now all of the G7 economies (the group of the major advanced economies including US, UK, Japan, Germany, France, Italy and Canada) are already in a recession or close to tipping into one. Other advanced economies or emerging markets (the rest of the Eurozone including Spain. Ireland the the other Euro members; New Zealand, Iceland, Estonia, Latvia and some other South-East Europe economies) are also on the tip of a recessionary hard landing.

And once this group of twenty plus economies enters into a recession there will be a sharp growth slowdown in the BRICs (Brazil, Russia, India and China) and other emerging market economies and likely tip the overall global economy into a recession.

So maybe the Reserve Bank's flagging of gradual interest rate easing may be too slow and delayed and it only happens when the G7 and global recession has become entrenched. They key for Australia is the slow down in China's exports and its trade surplus. is there any evidence that this is happening, due to the exposure of China's export base to the global economy? Brad Sester says nope.

| Posted by Gary Sauer-Thompson at 8:39 AM |